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On the importance of golden parachutes

Fich, E. M., Tran, A. and Walkling, R. A. (2013). On the importance of golden parachutes. Journal of Financial and Quantitative Analysis, 48(6), pp. 1717-1753. doi: 10.1017/S002210901300063X

Abstract

In acquisitions, target chief executive officers (CEOs) face a moral hazard: Any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999–2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia, while acquirer shareholders capture additional rents from target shareholders.

Publication Type: Article
Additional Information: Copyright Cambridge Journals 2013. This version may have been revised following peer review but may be subject to further editorial input by Cambridge University Press.
Publisher Keywords: Golden Parachutes; Acquisitions; Moral Hazard; Reservation Premium
Subjects: H Social Sciences > HF Commerce
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/5997
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